While nearing or past 30 years of age, there are a few critical concepts that you should understand if your goal is to be financially healthy.
Here are a few of them:
Net Worth
Your net worth is a good measuring tool of your financial status. Net worth is also easy to calculate as it's just the difference between your assets and liabilities (debts). It's a good exercise to plot your net worth regularly to have a good picture of your financial progress.
Inflation
You may have realized that when you were younger, your dollar could purchase more valuable stuff, unlike today. Your one dollar is just the same, but the prices of goods have increased. This is what you call inflation. Historically, the inflation rate hovers around 3%.
Liquidity
In financial terms, liquidity refers to the speed on how fast you can convert your assets to cash. For example, the money in the bank is very liquid as you can easily turn it into cash. Money market accounts are also liquid, but they earn a higher interest rate compared to a savings account. Some of your assets may be valuable, but they may not be as liquid. A good example of this is your home or car. Yes, these items have value but time is needed to convert them to cash. Hence, they are less liquid compared to money in the bank.
Interests
Interest is the money you pay or the money you earn based on the money being borrowed. Keep in mind that you could be the one borrowing the money or a financial institution borrowing from you (e.g. bank).
If you are putting your money in the bank, the bank is essentially borrowing money from you, and they pay you interest. On the other hand, if you borrow money from the bank, you will be the one paying interest.
Bull Market
The economy or market could either go up, down, or sideways. If the economy or market is going up, then the term bull market is applied.
Bear Market
Bear market is the complete opposite of the bull market. It means that the economy or market is going down.
Risk Tolerance
You can think of the market as a roller coaster. It never goes up or down in a straight line. It moves in ups and downs like a roller coaster. Just like an amusement park, there are different kinds of roller coasters. Some are wild, while others are mild.
In the financial market, risk tolerance simply refers to your ride preference. Maybe you are okay with the wild ups and downs of your assets. If so, you are considered to have a high-risk tolerance. Keep in mind that markets generally work in terms of high-risk, high reward, and low risk, low-reward. In other words, having high tolerance can quickly make you some money, but it's just as fast in making you go broke. It's your job to find the balance.
